Donnelly v Edelsten

[1994] FCA 148

MAX CHRISTOPHER DONNELLY AS TRUSTEE OF THE BANKRUPT ESTATE OF GEOFFREY WALTER
EDELSTEN v. GEOFFREY WALTER EDELSTEN; IAN CHARLES GOODMAN; DIANNE JOY ADAMS;
ESTHER EDELSTEN and ORS.
No. VG430 OF 1992
FED No. 148/94
Number of pages - 14
Bankruptcy
(1994) 49 FCR 384

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
NEAVES, RYAN AND LEE JJ

CATCHWORDS

Bankruptcy - after-acquired property of bankrupt - business and assets of corporations conducting medical centres - whether property of corporations property of bankrupt.

Bankruptcy Act 1966 Pt.VI, Divisions 4A, 4B; ss.32, 58, 149; sub-s.77(f)

Bankruptcy Amendment Act 1991

Corporations Law ss.161, 224

Hon. Mr Justice R.E. Cooper, "Duties of Trustees in Bankruptcy", (1993-94) 11 Aust. Bar Rev., 54

Griggs, L. "Limited Liability - Its Role in Corporate Australia Today", (1993) 6 CBLJ 83

Abalos v. Australian Postal Commission (1990) 171 CLR 167

Cutts v. Head (1984) 1 Ch. 290

Dennis Willcox Pty. Ltd. v. Federal Commissioner of Taxation (1988) 79 ACLR 267

Devries v. Australian National Railways Commission (1993) 177 CLR 472

Re Lovell; Ex parte Dixon (No. 3) (1904) Q.S.R. 262

Messiter v. Hutchinson (1987) 10 NSWLR 525

Sharrment Pty. Ltd. v. Official Trustee in Bankruptcy (1988) 18 FCR 449

Smith Stone and Knight Ltd. v. Lord Mayor, Alderman and Citizens of the City of Birmingham (1939) 4 All ER 116

Spreag v. Paeson Pty. Ltd. (1990) 94 ALR 679

HEARING

MELBOURNE, 7-11 June 1993
#DATE 28:3:1994

Counsel for the Appellant: A.B. Shand, QC

R.R.I. Harper

Solicitors for the Appellant: Price Brent

The First Respondent appeared in person.

Counsel for the Fourth, Tenth
and Twelfth Respondents: J.D. Mattin

Solicitors for the Fourth, Tenth
and Twelfth Respondents: Tiller and Co.

Counsel for the Ninth Respondent: T. Irlich

Solicitors for the Ninth Respondent: Irlich and Broberg

Counsel for the Fourteenth Respondent: G.R. Ritter, QC

D. Collins

Solicitors for the Fourteenth Respondent: Webbs

ORDER

The Court orders that:

1. The appeal be allowed in part and Order 10(a) of the Judgment dated 27 October 1992 be varied by deleting the date 28 April 1992 and inserting in its stead 28 May 1992 but otherwise the appeal be dismissed.

2. The cross-appeal be dismissed.

3. The appellant pay two-thirds of the costs of the fourteenth respondent.

4. The appellant pay the costs of the ninth respondent.

5. Otherwise there be no order as to the costs of the appeal or of the cross-appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

NEAVES, RYAN AND LEE JJ The appellant ("the trustee") is the trustee of the estate in bankruptcy of Geoffrey Walter Edelsten ("Edelsten"). Edelsten's bankruptcy commenced on 10 March 1988 when a sequestration order was made against his estate on a creditor's petition under the Bankruptcy Act 1966 ("the Act"). Edelsten was discharged from bankruptcy on 11 March 1991. No objection to the discharge was lodged by the trustee pursuant to s.149 of the Act.

1. In August 1991 the trustee applied to the Court for a declaration that property specified in the application was property acquired by Edelsten in the period of his bankruptcy and, therefore, was "after-acquired property" which vested in the trustee pursuant to s.58 of the Act.

2. The application was heard by a Judge of this Court (Northrop J) and declarations were made that several of the respondents to the application held shareholdings on trust for Edelsten and that the property in those shares had vested in the trustee. The application was dismissed in respect of the remainder of the declarations and orders sought.

3. In this appeal the trustee seeks to have the order dismissing the balance of the application set aside and replaced by, inter alia, a declaration that the "assets, undertaking and businesses owned and/or conducted by the VIP Companies" ("the VIP Group") vested in the trustee by reason of Edelsten's bankruptcy.

4. The trustee's application was not brought pursuant to Div.4A of Pt.VI of the Act. If that part of the Act has no application to the facts of this case, it may be said that a deficiency in those provisions has been exposed, not corrected by the insertion of Div.4B of Pt.VI, or by other amendments effected by the Bankruptcy Amendment Act 1991.

5. In the statement of claim filed in support of the application the trustee pleaded that the VIP Group owned or had owned and operated, (emphasis added) ten "medical clinics" ("the VIP businesses"), nine of which were situated in Melbourne and one in Adelaide. The trustee pleaded that Edelsten had "utilized" the VIP Group for the "setting up, promotion and conduct" of the VIP businesses. Particulars of that pleading alleged that Edelsten procured, controlled and directed certain persons to become directors of, and hold shares in, corporations in the VIP Group. It was also asserted as a particular of Edelsten's "utilization" of the VIP Group to set up, promote and conduct the VIP businesses that Edelsten "took for his own usage (sic) large sums of cash from the VIP businesses".

6. It was pleaded that Edelsten was the "principal of and directing mind and will of" several corporations, collectively described in the pleadings as the VIP Group, ("the VIP Group") and a director in fact and in law of each of the corporations. It was further pleaded that he was the beneficial owner of all, or of the majority, of the shares issued in the corporations, and that the nominated holders of those shares held the shares on trust for Edelsten.

7. It was then pleaded that Edelsten was "the beneficial owner of all the assets and undertakings or, alternatively, the majority interest therein, of the VIP businesses". There was no pleading that the corporations held such assets on trust for Edelsten and the pleading of beneficial ownership of the assets, on its face, was a pleading, albeit inappropriately expressed, that Edelsten, as sole beneficial shareholder in the corporations, had a beneficial interest in the net worth of the corporations. Such a construction of the pleading is borne out by para.14 of the statement of claim, the relevant part of which reads as follows:
   

"Edelsten has taken and kept for his own use assets of the VIP Group and each of them including cash:...thereby depleting the said assets and reducing the value of the shares in the VIP Group and each of them and the value of the VIP businesses and each of them."

1. However, the way in which the trustee's case was put to his Honour was described by his Honour as follows:
   

"It was contended further that in truth the VIP companies should be treated as mere shams and that all the property of the VIP companies was, in truth and in law, the property of Dr Edelsten. It was said that this property and the shares of the VIP companies vested in Dr Edelsten during the period of his bankruptcy and thus, pursuant to the provisions of the Bankruptcy Act, vested in the applicant as trustee of the bankrupt's estate."

1. The trustee pursued that argument in this appeal under the rubric of "lifting the corporate veil".

2. A summary of relevant facts, as found by his Honour, is as follows. Some years before 1988 Edelsten, a medical practitioner, had established, and been involved in, the operation of medical centres in the State of New South Wales. By February 1988 it was apparent to Edelsten that his right to practise medicine in New South Wales was in jeopardy. In February 1988 Edelsten invited a patient, Thurtell, who practised as an accountant, to become "involved in the running of the medical centres". Thurtell controlled a company, later known as VIP Medical Centres of Excellence Pty. Ltd. ("Excellence"), and through it Thurtell "took over the ownership of the businesses then being conducted (by Edelsten's wife) at a number of medical centres in New South Wales". Apparently, Excellence succeeded to ownership of the businesses by oral accord. Excellence made no payment to Mrs Edelsten to acquire the businesses and their assets but did make an "arrangement" with Edelsten to "engage him as a doctor carrying out his practice at the medical centres".

3. Edelsten suggested to Thurtell that Excellence should establish a medical centre in Melbourne. Edelsten investigated the proposal and he and Thurtell visited Melbourne and agreed that a medical centre be established at Kingsbury, a suburb of Melbourne. Excellence opened the Kingsbury Medical Centre in May 1988. Excellence took a lease of the premises on which the medical centre was conducted and employed a medical practitioner as the Medical Director of the centre. Excellence opened a second medical centre at Dandenong, another suburb of Melbourne, in November 1988.

4. After Edelsten was struck off the roll of medical practitioners in New South Wales in December 1988, he moved to Melbourne where his entitlement to practise medicine continued. Excellence provided him with accommodation, a car, living expenses and a weekly allowance and "employed" him as a medical practitioner providing services in several of the medical centres. Edelsten was also employed as a consultant to Excellence with respect to the management of the medical centres.

5. After Edelsten returned to Melbourne, several medical centres were commenced, ostensibly by a corporation, later known as VIP Management Pty. Ltd. ("VIP Management"), a corporation in the VIP Group. Edelsten had suggested to Thurtell that Excellence should establish more medical centres in Melbourne but Thurtell had been unwilling to commit Excellence to that course. Between January 1989 and June 1989 VIP Management opened medical centres at Kealba, Clayton, Brunswick, Mill Park and Broadmeadows in Melbourne, and one in Adelaide.

6. In mid 1989 Thurtell resolved that Excellence would sell its interest in all the medical centres in Sydney and in the Kingsbury and Dandenong medical centres in Melbourne. Thurtell and Edelsten conducted negotiations in that regard. An oral agreement was made between Thurtell on behalf of Excellence and Edelsten on behalf of a company in the VIP Group known as Circuit Towers Pty. Ltd. ("Circuit Towers"), that Circuit Towers would "purchase" the interest of Excellence in the medical centres for $900,000 to be paid by monthly instalments of $15,000. In December 1989 Circuit Towers discharged debts due to creditors of Excellence in satisfaction of the first instalment of $15,000. No other instalments were paid.

7. In fact, by June 1989 Circuit Towers had taken over the "conduct" of all medical centres in Melbourne, Adelaide and Sydney operated by VIP Management and by Excellence. How that came about was not described to his Honour in other than the most general of terms.

8. As the learned trial judge found:
   

"Prior to the agreement between Excellence and Circuit Towers at the end of 1989, Circuit Towers Pty Ltd had become involved with the medical centres in Melbourne, and for that matter in Sydney. Circuit Towers subsequently became VIP Health Corporation Pty Ltd and is hereinafter called "VIP Health Corporation". By various means, VIP Health Corporation became the company which, in substance, conducted all the VIP medical centres in Melbourne, including Kealba, and Adelaide from about June 1989."

1. It appears to have been accepted by the trustee that a person other than Edelsten held the beneficial interest in the medical centres in Sydney as of February 1988, and that the transaction, in which Excellence became the proprietor of those businesses, was not a sham. It does not appear to have been contended that the Sydney medical centres acquired by the VIP Group from Excellence became property acquired by Edelsten; although it does appear to have been pleaded that the "setting up, promotion and conduct" of medical clinics by the VIP Group, as "utilized" by Edelsten, extended to the Kingsbury and Dandenong centres established by Excellence.

2. VIP Health Corporation operated the medical centres in Melbourne and Adelaide between 1989 and 1992 until it became insolvent. It ceased trading on 10 January 1992. Whether the medical centres in Melbourne, Adelaide and Sydney ceased to operate on that day is not clear. By an agreement in writing dated 13 February 1992, VIP Health Corporation sold certain "assets" and "rights" to Australian Medical Developments Limited ("AMD"). The assets consisted of plant and equipment used in the medical centres and the rights related to the use of advertising and promotional signs. AMD agreed to pay $258,228 for the assets and $3,000 for the rights. The combined sum was to be paid by a deposit of $15,000 within thirty days of 13 February 1992, and by monthly instalments of $15,000. AMD entered into leases with the landlords of each of the premises on which five of the medical centres had been conducted by VIP Health Corporation, namely Kingsbury, Kealba, Brunswick, Mill Park and Broadmeadows and began to operate medical centres at those premises. There was some evidence that AMD conducted medical centres in the premises in which VIP Health Corporation had operated medical centres at Adelaide and Dandenong.

3. On 6 March 1992 the trustee was given leave to amend the application filed in August 1991 by joining AMD as a respondent. Thereafter, the trustee sought a declaration that AMD held "the assets, undertaking and goodwill" of the businesses of medical centres conducted at Kingsbury, Kealba, Brunswick, Mill Park and Broadmeadows on trust for the trustee and an order restraining AMD from dealing with the assets, undertaking and goodwill of the "clinics". According to the trustee's statement of claim it was alleged that AMD knew, or ought to have known, that VIP Health Corporation held the "assets" sold to AMD on trust for the trustee, being assets "acquired by Edelsten whilst bankrupt".

4. On 24 April 1992, the Supreme Court of Victoria ordered that VIP Health Corporation be wound up and appointed a liquidator.

5. The hearing of the trustee's application commenced on 28 April 1992 and was conducted on affidavits. Several deponents were cross-examined. The hearing was set down for four days but took four weeks separated by adjournments. No evidence was presented on affidavit by AMD or Edelsten.

6. His Honour gave close attention to the evidence of witnesses who were cross-examined and set out in his reasons how he had assessed them. His Honour also identified the evidence he accepted and the evidence he rejected.

7. His Honour found that the whole of the evidence provided strong support for the conclusion that Edelsten was the "guiding hand and controlling mind" of the activities of the VIP Group, and that such control was directed to establishing and conducting the medical centres; he found that Edelsten was the "driving force" behind the operation of the medical centres conducted by Excellence and by the VIP Group. His Honour was satisfied that Edelsten formed the idea to create the VIP Group to establish and conduct medical centres, and that Edelsten decided who would be the shareholders and directors of the VIP Group; his Honour was satisfied that Edelsten was able to direct those parties to suit his will.

8. His Honour found that, as attested by his display of cross-examining skills, Edelsten appeared to be articulate and intelligent and possessed a good memory. His Honour's conclusion that Edelsten had been the dominating personality behind the VIP Group was fortified by that impression.

9. On the hearing of the appeal, Edelsten appeared in person as a respondent to the appeal and pursued a cross-appeal which challenged a number of the findings his Honour had made in reaching the conclusion that all shareholders in the VIP Group held their shares on trust for Edelsten.

10. Edelsten cited numerous passages from his Honour's reasons which Edelsten submitted displayed findings for which there was no evidence or which were contrary to the weight of evidence. Further passages, it was said, showed that "relevant considerations had been given no weight or insufficient weight".

11. The case before his Honour involved inferences able to be drawn from various documents, evidence presented on affidavit and viva voce evidence adduced in cross-examination. There was a wide spectrum of evidence to be dealt with by his Honour and impressions of witnesses formed by his Honour, after observation of their demeanour and conduct in the witness box, were important considerations in the assessment of that evidence. Competing inferences may have been raised by the evidence and it was for his Honour to determine what inferences, if any, should be drawn, and for his Honour to make findings of fact after having due regard to the weight he thought appropriate to assign to the various aspects of the evidence and, in respect of viva voce evidence, whether a witness had impressed him favourably or unfavourably.

12. In no sense could it be said that findings of fact made by his Honour were made in the absence of evidence, thereby disclosing an error of law. Nor could it be said that his Honour's findings were "glaringly improbable". In those circumstances no ground was made out to permit this Court either to embark upon a reconsideration of the evidence or to review his Honour's findings and disregard the particular advantage his Honour enjoyed in receiving and assessing the evidence. (See: Devries v. Australian National Railways Commission (1993) 177 CLR 472; Abalos v. Australian Postal Commission (1990) 171 CLR 167.)

13. Given that Edelsten participated in the hearing by opposing the finding, eventually made by his Honour, that shareholders in the VIP Group held their shares on trust for Edelsten, it followed that there was no foundation for the further ground of the cross-appeal, namely that his Honour erred in ordering Edelsten to pay one-half of the trustee's taxed costs.

14. Edelsten also contended in his cross-appeal that his Honour had fallen into error in relying upon observations of demeanour and apparent depth of knowledge of relevant matters displayed by Edelsten's cross-examination of various witnesses.

15. His Honour, an experienced Judge, noted that such a course would not have been open if Edelsten had been represented by a legal practitioner but when a party chose to participate in the hearing without representation the manner in which the case was conducted by, and the demeanour of, that party may fortify the inferences to be drawn from the evidence.

16. His Honour stated that the evidence before him gave the impression that Edelsten was a dominant person able to get others to do his will. The evidence also suggested that Edelsten had a wide-ranging mind, ability and drive. Having observed Edelsten conduct cross-examinations at length, his Honour was satisfied that the inferences made available by the evidence, if drawn, would be soundly based. His Honour was well aware that limited use could be made of the observation of Edelsten's demeanour in presenting his case by cross-examination, and the extent to which his Honour did refer to Edelsten's demeanour and grasp of affairs was circumscribed accordingly and displayed no error.

17. Having made those findings, his Honour turned to the activities of the VIP Group and paid regard to more than incidental evidenceshowing that the corporations had made commitments under leases of land and chattels, made employer/employee agreements, conducted bank accounts, engaged in dealings with the Health Insurance Commission, incurred debts with suppliers of goods, and carried out activities normally performed by corporations engaged in business.

18. His Honour was satisfied that the acquisition and conduct of the medical centres had involved the VIP Group in real, and not sham, transactions.

1. There was a paucity of evidence before his Honour to explain how the affairs of the VIP Group had been conducted in detail. The material presented to his Honour appeared as an amorphous melange, capable of sustaining a conclusion that Edelsten had been involved in all aspects of control and proprietorship and that the corporate entities, and the purported managers thereof had been merely scenery moved around by Edelsten to reflect whatever landscape he sought to construct.

2. However, it was also possible to conclude, despite the confused nature of much of the evidence, that the corporations had carried on business and been conducted by persons who were controlled by, or required to report to, Edelsten as the beneficial owner of the entire shareholding of the corporations. The business and affairs of the corporations may have been carried on in defiance of laws prohibiting a bankrupt from managing such entities but nonetheless, the conduct engaged in remained the conduct of the corporations.

3. Much depended on his Honour's assessment of the evidence. His Honour found that the proper conclusion on the evidence was that the corporations had engaged in transactions with third parties as directed by Edelsten. His Honour was satisfied that the use of the corporations had not been restricted to the use of a corporate name as a facade to mask or disguise the personal acts of Edelsten, and was satisfied that, in fact, the corporations had carried on business; albeit under the control of Edelsten. It was through his control of the corporations, and not through his conduct of the businesses personally, that Edelsten had controlled the management of the medical practices.

4. Complete control or management of a corporation by a controlling shareholder is a common occurrence in the affairs of proprietary companies. Acts, which on their face may appear to be the personal acts of such a shareholder are, in fact, the acts of a corporation, and the liability of the shareholder is limited accordingly. It is a disadvantage that flows from the use of a legal fiction that a corporation - the acts of which must always be the acts of natural persons - has "the legal capacity of a natural person" (Corporations Law s.161). (See: "Limited Liability - Its Role in Corporate Australia Today", L. Griggs (1993) 6 CBLJ 83.)

5. His Honour was well aware of the need to scrutinize the evidence very carefully to see whether, in truth, transactions in the name of the VIP Group were sham transactions and whether, in fact and in law, Edelsten had been the person engaging in those transactions. His Honour was not satisfied on the evidence that the trustee had proved the case it had sought to establish at the hearing.

6. On the hearing of the appeal it was argued that the Court should have disregarded the position of the VIP Group as apparent owners of the assets and businesses of the medical centres and should have characterized those assets and businesses as after-acquired property of Edelsten. It was submitted that the separate legal personality of the VIP Group was to be disregarded by reason of the use of those corporate entities in sham transactions, or to enable legal, or fiduciary obligations to be evaded or a fraud to be perpetrated. It was submitted that either of these circumstances would entitle the Court to "lift the corporate veil".

7. By way of illustrating the readiness of courts to disregard the separate legal personality normally recognized as being possessed by corporations, reference was made to Dennis Willcox Pty. Ltd. v. Federal Commissioner of Taxation (1988) 79 ACLR 267. But in that case, Jenkinson J, with whom Woodward and Foster JJ agreed, reviewed a number of authorities in this area and concluded, at p.274:
   

"Neither the circumstance that a company is completely subject to the ownership and the direction of another person nor the circumstance that that other person exercises directorial control of the activities of the company in ways which minimise the manifestations of the company's separate legal identity will justify, in my opinion, a conclusion that acts in the law formally done by the company are to be regarded, for purposes of the kind here in question in relation to Australian income tax law, as acts in the law done by that other person."

It was submitted on behalf of the trustee that the evidence supported a conclusion that Edelsten, during his bankruptcy, had used the VIP Group to disguise his ownership of property. The argument, as we understood it, involved the concept of "sham" by applying it, not to an identifiable transaction or series of transactions, but to the whole structure erected by the acquisition of control of the VIP Group and the conduct, through them, of the businesses of the twenty-four hour medical centres.

1. The concept of "sham" has been comprehensively considered by a Full Court of this Court in Sharrment Pty. Ltd. v. Official Trustee in Bankruptcy (1988) 18 FCR 449 where most of the relevant authorities are conveniently collected and discussed. In that case Lockhart J observed, at p.454:
   

"A 'sham' is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive. The central issue in the case is the dichotomy between appearance and reality in characterising the transactions in 1979 as a sham. This dichotomy was recognised by the trial judge in his reasons for judgment. The real difficulty in this case is not to determine the applicable principles of law but rather to characterise the transactions as a matter of fact."

1. Lockhart J then proceeded to evaluate certain elements and aspects of the transactions with which the Court was then concerned; concluding that they did not contribute to the characterization of the transactions as "shams". So far as is relevant to the present appeal, that evaluation included these observations, at p.455:
   

"Fourthly, a purported disposal of property, and by analogy a purported creation of a debt, may be a sham where donor and donee (or lender and debtor) do not intend to give effect to the transaction, it being agreed between them that there will be no change in the legal and beneficial ownership of the property. The fact that Mr Wynyard continued to act as though The Chase was in his control may give rise to an inference that the transactions which led to its being purchased in the name of Seyta with funds apparently the funds of Seyta were a sham.

Fifthly, the fact that the transactions of 1979 may have been intended by Mr Wynyard to present a shield against creditors does not, absent the transactions being set aside under the relevant provisions of the Bankruptcy Act, characterise them as a sham. The transactions may in themselves be legally effective although intended to achieve an inacceptable purpose. In Miles v Bull (supra) Megarry J said (at 264):

'A transaction is no sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it.' Megarry J went on to observe (at 264) that in the context of determining whether a sale of property was a sham so as to allow a defence to an action for possession that:

'mere circumstances of suspicion do not by themselves establish a transaction as a sham; it must be shown that the outward and visible form does not coincide with the inward and

substantial truth'.

The characterisation of a sham adopted by Megarry J in Miles v Bull is consistent with that adopted by Windeyer J in Scott's case at 279, in the passage which I cited above. Following a thorough review of the earlier authorities, Windeyer J there defined the issue as whether the parties who entered the ostensible transaction '...mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction.'"

1. In the present case, as the learned trial judge found, the VIP Group were real corporations in that they were properly incorporated and administered in accordance with the requirements of the law relating to corporations. The question, therefore, was whether the acquisition or creation of the businesses of twenty-four hour medical centres as the property of the VIP Group was a sham; it being agreed and intended that the legal and beneficial ownership of those businesses should be and remain in Edelsten. Some support for an affirmative answer to that question might have been afforded had the conclusion been open that Edelsten had at all times treated the businesses and assets as his own. However, the evidence accepted by the learned trial judge negates that conclusion.

2. We respectfully agree with the views expressed by Lockhart J in Sharrment that a transaction, or the creation of a corporate structure for the ownership of a business is not to be characterized as a sham because it was undertaken for the purpose of ensuring that any property acquired after bankruptcy did not fall into the hands of a trustee in bankruptcy. Accepting that Edelsten was concerned to ensure that property generated by the establishment and operation of the medical centres, including goodwill deployed or created in those centres, should be insulated in that way, we consider that the reasoning expounded by the Full Court in Re Lovell; Ex parte Dixon (No. 3) (1904) QSR 262 continues to apply. In that case Chubb J, with whom Noel J agreed, observed at p 279:
   

"The contention for the trustee is that, viewing the whole transaction these shares really belong to the insolvent, and that the object of making the issue in this form was to prevent the trustee from obtaining them for the benefit of the insolvent's creditors. It is to be observed that before the insolvent did anything under the agreement the shares had come into existence. He had agreed to do certain work in exploring on what was thought to be a petroleum field, but before he had performed any of the work undertaken these shares were called into existence and in the name of his wife. It is clear that the shares, whenever they came into existence, are property, and the questions to be considered are, Whose property? And was the property produced by the personal services or the promised personal services of the insolvent? It has long been established that the trustee cannot command the personal services of an insolvent; he cannot compel him to work, but if the insolvent himself chooses to work, and as a result of his personal exertions acquires property, there is no doubt that the trustee is entitled to that property. In the case of personal earnings arising from the personal efforts of the insolvent the right of the trustee rests upon the principle that the personal earnings, after a deduction has been made of what is reasonably necessary for the maintenance of the insolvent and family, are surplus property acquired by the insolvent, either in his hands or in the hands of some person from whom he is entitled to receive it. In re Shine, Ex parte Shine (1892) 1 QB 522, In re Roberts (1900) 1 QB 122.

The law does not prevent an insolvent from making a bargain to work for nothing, or to do work for the benefit of a third party. On this question, the learned Judge in the Court below said, 'But I hold as a matter of law that the trustee has no claim to or property in the services of the insolvent; that an insolvent is free, so far as his trustee is concerned, to work or not, as he may please, and for any consideration which he may please, and for the benefit of himself or any other person or persons at his own free will, and that if in fact an insolvent gives his services for the benefit to be conferred on another, that benefit, when received by the third person, is that third person's property, and cannot be made the property of a trustee, except by holding that it was in truth a pretence, and in form only given to the third person, but in fact intended and given for the benefit of the insolvent.' With that statement of the law I entirely agree, and I see no reason for differing from the learned Judge's findings on the facts."

1. As yet the Act has not been amended to defeat such conduct by a bankrupt or person anticipating bankruptcy.

2. Of course, if assets had vested in Edelsten before the date of his bankruptcy, or had been acquired by him thereafter, and an attempt had been made to disguise them as the property of the VIP Group, the result would be different. In that event, the assets would be held on a resulting or constructive trust for Edelsten, or the transactions by which they were purportedly vested in the companies would be disregarded as shams.

3. However, in the present case, no assets owned by the VIP Group were identified as having been acquired by Edelsten before or after his bankruptcy or as traceable to any assets so acquired. The businesses of the medical centres and the assets deployed in them were essentially built up from nothing with funds borrowed with the aid of personal guarantees given by Thurtell and others, or advanced by Excellence as unpaid vendor. Doubtless, the establishment of the practices and their relatively quick generation of substantial cash flows owed much to the experience, expertise and energy of Edelsten. However, to acknowledge that fact falls far short of identifying any part of the assets of the businesses which reflects, in its original or transmuted form, part of the property of Edelsten, whether acquired before or after the bankruptcy.

4. It was then submitted that the VIP Group had been incorporated and used for the purpose of evading a legal obligation namely, "Edelsten's duty under sub-s.77(f) of the Act to disclose to the trustee, as soon as practicable, the property acquired by him or devolved on him before the bankruptcy has been discharged".

5. The argument is, of course, circular. It can only succeed if the argument of sham succeeds, because if no property was acquired by, or devolved upon, Edelsten, no duty capable of being evaded could arise under the Act. The trustee also relied upon, in aid of this argument, the provisions of the Corporations Law (s.224) relating to disqualification of a bankrupt from being involved in the management of corporations. However, such provisions are intended to secure the due management of corporations rather than control the administration of estates in bankruptcy. The requirement that Edelsten not be involved in the management of a corporation cannot result in the conversion of property of a corporation to property of Edelsten for the purposes of the Act. His Honour found that the businesses, and the assets of the businesses, were the property of the corporations. It was accepted that Edelsten's intention to control that property, through control of the corporations, may have consequences under the Corporations Law but no legislative provision made such property of the corporations part of Edelsten's estate in bankruptcy as a consequence of the breach of the Corporations Law.

6. The submission that the VIP Group had been used to perpetrate a fraud was coincident, and stood, or fell, with the submissions which sought to have the transactions, by which the VIP Group acquired property, treated as shams.

7. By leave granted at the hearing of the appeal, the trustee was permitted to add the further ground of appeal that the VIP Group acted as agents for Edelsten at all material times so that "the assets, undertaking and goodwill, being the businesses purported to be conducted by the VIP Group at the medical centres at Brunswick, Kingsbury, Mill Park, Broadmeadows and Kealba were so conducted and constituted property held by (the VIP Group) as agents for (Edelsten)".

8. Counsel suggested that support for this submission could be found in Smith Stone and Knight Ltd. v. Lord Mayor, Alderman and Citizens of the City of Birmingham (1939) 4 All ER 116 and in Spreag v. Paeson Pty. Ltd. (1990) 94 ALR 679. Smith Stone was a case dealing with the particular relationship of a parent company and a wholly owned subsidiary and set out criteria for determining whether a business conducted ostensibly in the name of the subsidiary was, in truth, the business of the parent. Spreag reaffirmed the hallmarks of agency, the existence of which must be found in the facts of a particular case.

9. The findings of his Honour in the present case are antithetical to a finding that any company in the VIP Group was, in any respect, an agent of Edelsten.

10. Having dismissed the trustee's application for orders against AMD, his Honour ordered that the trustee pay AMD's costs incurred after 28 April 1992 taxed on an indemnity basis, except in so far those costs were unreasonable in amount, or had been unreasonably incurred. The trustee appealed from that order submitting that in making the order his Honour failed to take into account the special position of the trustee as a person obliged by statute to administer a bankrupt's estate in the public interest. (See Mr Justice Cooper, "Duties of Trustees in Bankruptcy", (1993-94) 11 Aust. Bar Rev., 54 at pp.55-56.)

11. The contention that a trustee in bankruptcy, under a statutory duty to take steps that are necessary and reasonable to obtain possession of property or declarations of entitlement to the property of a bankrupt, should not readily be subjected to an order for costs, has some force. It cannot be in the interest of creditors, or in the public interest, to dissuade a trustee from approaching the Court for orders necessary to allow the trustee properly to administer the estate of a bankrupt. On the other hand, it will not be in the interest of the creditors, nor in the public interest, to have the meagre funds of an estate squandered on the costs of the trustee and other parties, in a proceeding that has little chance of success or may reasonably be compromised. If the trustee is in doubt as to the course to be followed he or she would be expected to obtain adequate advice in that regard. His Honour made no direct reference to the trustee's statutory obligations but in detailed separate reasons on the matter of the order for costs made it clear that he was well aware of the capacity in which the trustee had conducted the litigation.

12. His Honour found that the joinder of AMD as a respondent at the request of the trustee had been reasonable and appropriate. The basis on which his Honour found that the trustee should indemnify AMD for costs incurred after the commencement of the hearing was the trustee's failure to accept the offer made by AMD on the day before the commencement of the hearing; the substance of the offer being that the trustee discontinue the proceeding against AMD and there be no order as to costs.

13. On 28 May 1992, in the course of the hearing, AMD made a further offer to settle the proceedings on terms which, on their face, were most favourable to the trustee. The trustee rejected that offer. His Honour decided that the principles enunciated in Cutts v. Head (1984) 1 Ch 290 were equally applicable to the exercise of discretion in respect of costs under s.32 of the Act. His Honour held that before determining whether a party who had made an offer to compromise and had succeeded in the proceeding should be entitled to costs to be taxed in whole or in part on an indemnity basis, it was appropriate to consider the content of the offers made and assess the reasonableness of the conduct of the offeree in response to the offers having regard to all the relevant circumstances.

1. In the light of his Honour's conclusion that the trustee had properly joined AMD, and that it was appropriate to have AMD present during the conduct of the hearing, and to the fact that AMD's first offer of compromise was no more than a proposition that the trustee discontinue against AMD with no order as to costs, it is surprising that his Honour decided that AMD was entitled to costs on an indemnity basis from the day after that letter. His Honour acknowledged that at the time the offer was made, the trustee may not have been fully aware of the true position, although he would have been aware that the case against AMD was not strong. Given that it had been found that AMD had been properly joined and that the offer had not been made until immediately before the commencement of the trial, the proper conclusion would have been that it was not unreasonable for the trustee to allow the issues raised in the matter to be dealt with in a hearing that was about to commence and had been set down to be completed in four days.

2. The offer made on 28 May 1992 however, was made at a time when the trustee had had ample time to assess the strength of the case against AMD and involved an offer that was extremely favourable to the trustee. In all the circumstances, the trustee's failure to accept that offer was quite unreasonable and it would have been unfair to AMD to require the trustee to meet only part of AMD's costs after that date and have AMD bear the costs for which it was not reimbursed by the trustee. It may be said that such an order is not intended to punish a party who has failed to obtain judgment in terms as favourable as those contained in a rejected offer of compromise. The foundation for the order is the need for the costs order to do equity where a party who has succeeded in the proceeding has made a reasonable attempt to terminate the proceeding by an offer to compromise shown to have been a fair offer in all the circumstances and to have provided appropriate opportunity for the offeree to consider and deal with the offer. (See Messiter v. Hutchinson (1987) 10 NSWLR 525.)

3. It follows that the appeal should be allowed in respect of the order for costs by deleting the date 28 April 1992 and inserting in its stead 28 May 1992 but otherwise the appeal should be dismissed. The cross-appeal should also be dismissed.

4. The appropriate orders for costs of the appeal and cross-appeal are first that the trustee pay two-thirds of AMD's costs of the appeal, AMD having failed in part on the issue of costs and entirely on the issues it argued in its notice of contention. Secondly, there should be no order for the costs of the appeal or cross-appeal as between the trustee and Edelsten. Thirdly, the trustee must pay the costs of the appeal of VIP Health Corporation Pty. Ltd. (in Liquidation).